Step 1: Find a mortgage that’s
right for you.
The most common types are 30-year and 15-year fixed mortgages where the interest rate is fixed for the term of the loan. Other types include Adjustable Rate Mortgages (ARMs) where the interest rate can vary over time, hybrid ARMs, jumbos, assumables and seller financing. |
Step 2: Determine how much house
you can afford.
Consider the equity in your current home (if you own), the amount you can put down, monthly payments you can manage, real estate taxes, closing costs and insurance (definitely homeowners insurance and probably Private Mortgage Insurance (PMI) if you put less than 20% down). Monthly payments on debt obligations including items such as credit card bills, alimony, child support and student loans should not be more than 36% of your pre-tax income. |
Step 3: Check your credit.
A potential lender will check your credit report immediately. It's best to clear up any credit problems before you apply for a mortgage. Click here to get your credit report or call Equifax (800-685-1111), Experian (888-397-3742) and TransUnion (800-888-4213). |
Step 4: Pre-qualification and pre-approval.
If you haven't found a home yet, consider getting pre-qualified (a lender will review your financial history before you find a home) or pre-approved (a lender will check your credit and provide you with a letter stating that you've been pre-approved for a certain amount). Both of these will help improve your purchasing power. Click here to get pre-qualified or pre-approved. |
Step 5: Gather the necessary paperwork.
Below is a list of the paperwork you'll need:
- W-2 forms from the previous two years
- Federal tax returns from the previous two years
- Recent paycheck stubs
- Documents showing other sources of income, which could include second jobs, overtime, commissions and bonuses, interest and dividend income, Social Security payments, VA and retirement benefits, alimony, and child support
- A complete list of your creditors, such as credit cards, student loans, car loans and child support payments, along with minimum monthly payments and balances
- Investment records including mutual fund statements, real estate and automobile titles, stock certificates and records of any other investments or assets
- Canceled checks for your rent or mortgage payment
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Step 6: Find a lender.
Finding the right lender is an important step to ensure a positive loan experience. GoApply makes this task easy. Simply click here, fill out the short information form and we'll have one or more licensed professional mortgage brokers or lenders contact you to discuss current loan rates and availability specific to your circumstance. Remember that a low interest rate doesn't always mean it's the best loan for you. In addition to the annual percentage interest rate, check on points (pre-paid mortgage interest which will increase your upfront costs) and other fees associated with a given loan. Compare mortgage loan offerings and talk to several lenders before you apply for your loan. |
Step 7: Assess your potential home.
Hopefully, you've found your dream home by this time. Be sure to evaluate the home thoroughly to make sure it's what you really want. An appraisal is part of the mortgage process and will ensure that you're paying the appropriate price for your home. |
Step 8: Prepare for closing.
Make sure the closing is scheduled before your loan commitment and any rate lock-in will expire. Also, be sure there is enough time to finish any loan documentation and complete any home inspections or repairs. |
Step 9: Closing day!
Congratulations, you're about to own a new home! At the closing you will have to sign legal documents and pay closing costs (these could include surveying, taxes, insurance, attorney fees, agent fees, points, loan origination fees, PMI and balance of down payment). |
| Step 10: Servicing the mortgage.
At closing, your mortgage lender must tell you who will be servicing or administering your mortgage loan. Traditionally, the mortgage banker would service the loan for the life of the mortgage on behalf of the investor. However, the servicing may be handled by a third party. |
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Maximum monthly debt obligation based on $50,000 annual salary |
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| Down the road… |
Removing PMI:
You should be able to remove PMI once the equity in your home reaches 20% of the property value either because the loan balance has been decreased below 80% or because your home has appreciated in value. |
Prepayment:
The motivation for prepaying a mortgage is simple - you save money on interest. And it can add up to a lot of money. You can create a prepayment schedule yourself, or your mortgage company can set up a formal biweekly pre-payment plan. Be sure to consider the tax implications of prepayment though. Because prepaying reduces mortgage interest, which is deductible from your income tax, you may wind up owing more income tax. Depending on your tax bracket, prepayment may not be beneficial for you. |
Refinancing:
In today's market, if you're planning to stay in your home for a while, and you find a good deal on refinancing costs, it may be worthwhile to refinance with as little as a 0.5% lower rate. Refinancing involves many of the same steps you took when obtaining a mortgage the first time around.
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Points
or lower interest rate? 30 year $100,000 mortgage |
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Rate |
Points |
Monthly
Payment
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Cost of Points
(paid at closing)
|
Total Interest |
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$632
$ 699
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$3000
0
|
$127,544
$151,717
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| Comments
Paying points usually lowers your interest rate. If you plan on staying in your home for a while consider paying the points. Also, if low monthly payments are your priority and you have the cash for points, then pay the points. But, you may want to consider an alternative investment for your cash instead of paying the points upfront.
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Economics
of Buying a Home |
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Home price |
= $150,000 |
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Cash down payment |
= $15,000 (10% down) |
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Mortgage |
= $135,000 |
|
Loan APR |
= 7% |
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Term |
= 30 years |
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Monthly loan payment |
= $896.16 |
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Monthly PMI payment (will vary –
approximate) |
= $56.25 |
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Total monthly payment |
= $954.41*
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| *Allow for additional monthly costs such as homeowner's insurance and property taxes. The seller usually pays the real estate agent's commission. Additional costs include: closing costs, agent fees (if you're selling your home), insurance, legal fees, points, application fees, etc. |
About
ARMs (Adjustable Rate Mortgages) |
| 1. If you're going to be moving or only living in the house a few years, lower-rate ARMs are a good option. |
| 2. After the initial fixed period, most ARMs adjust every year on the anniversary of the mortgage. Some ARMs adjust every three years, based on yields on the three-year Treasury securities. |
| 3. On an adjustable rate mortgage, there is usually a maximum annual increase of two percentage points and a lifetime cap of six percentage points. Note: ARMS can be tempting, but they come with some uncertainty. That's why more than 75% of homeowners opt for a fixed-rate mortgage. You need to ask if you can afford the highest possible payment in such a worst-case situation. |
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Interviewing Mortgage Lenders |
It's always best to compare several lenders before committing to one. Be sure to ask questions like:
- What is the interest rate on this mortgage?
- How many discount and/or origination points will I have to pay to get this rate and loan?
- What closing cost will be charged on this loan, and will you profile a "good faith estimate" of those costs up front?
Click here to download a printable worksheet covering these questions and more to help you compare
and take notes on each lender you interview.
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